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Discussion Paper Details

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Title: Strategic Asset Allocation in a Continuous Time VAR Model

Author(s): John Y Campbell, George Chacko, Jorge Rodriguez and Luis M Viceira

Publication Date: December 2003

Keyword(s): intertemporal hedging, long-term investing, portfolio choice, recursive utility and time aggregation

Programme Area(s): Financial Economics

Abstract: This Paper derives an approximate solution to a continuous-time intertemporal portfolio and consumption choice problem. The problem is the continuous-time equivalent of the discrete-time problem studied by Campbell and Viceira (1999), in which the expected excess return on a risky asset follows an AR(1) process, while the riskless interest rate is constant. The Paper also shows how to obtain continuous-time parameters that are consistent with discrete-time econometric estimates. The continuous-time solution is the limit of that of Campbell and Viceira and has the property that conservative long-term investors have a large positive intertemporal hedging demand for stocks.

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Bibliographic Reference

Campbell, J, Chacko, G, Rodriguez, J and Viceira, L. 2003. 'Strategic Asset Allocation in a Continuous Time VAR Model'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4160